Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
How Does Mandatory IFRS Convergence Impact on
Foreign Investment? Evidence from Taiwan
Chung-Hao Hsu* and Syou-Ching Lai**
Based on broadly verified benefits of financial statements comparability, we
examines whether mandatory convergence strategy before adoption of
International Financial Reporting Standards (IFRS) in a unique country, Taiwan,
increases foreign mutual fund investment in its common stock at firm level. We
find that, on average, foreign investment increases for firms that affected by the
phased strategy and for firms with larger net assets cumulative difference
between new IFRS-based standards and local GAAP-based standards, after
controlling for year-fixed and industry-fixed effect. We also find that foreign
investment funds, but not amounts, increase by larger net income cumulative
difference. We further partition it by individual new accounting standard in the
convergence period and find that some of the difference can separately result in
more increasing investment of foreign mutual fund. Overall, compared with
domestic investors, our results indicate that a common set of global accounting
standards matters for foreign investors. The sophisticated foreign investors
consider the cumulative amount and the recurrence of separate IFRS-based
standard respectively and simultaneously to be the key factor in making
investments, even on convergence stage.
JEL Codes: M40, M41, G15, G18 and G23
Keywords: Convergence; International Financial Reporting Standards;
Foreign Investment; Mutual Fund
Data Availability: Data are publicly available.
* Mr. Chung-Hao Hsu, Department of Accountancy, National Cheng kung University, Taiwan,
ROC. Email: r1897102@mail.ncku.edu.tw
** Associate Prof. Syou-Ching Lai, Department of Accounting and Information System, Chung
Jung Christian University, Taiwan, ROC. Email: sclai@mail.cjcu.edu.tw
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
1. Introduction
Differences between accounting standards across borders are perplexed
question for a long time. That is often cited as an important factor affecting the
information acquiring and processing costs of foreign investors who wish to
diversify globally. The foreign investors must make efforts to understand
multiple sets of accounting standards in order to compare companies in
different countries. Between countries with a common set of accounting
standards can provide comparability benefits to users of financial statements
(Hail et al. 2009).
Investors’ propensity to overweight domestic stocks, underweight foreign
stocks in another word, in their common stock portfolios is generally referred to
as home bias, a well-established empirical regularity. Besides trade restrictions
upon foreign investors, a common explanation is an informational disadvantage
when investing in foreign markets with poor information disclosure. It is more
expensive for foreign investors, compared to domestic investors, to obtain
relevant information about firms in non-home markets, especially when
accounting standards differ.
The U.S. Securities and Exchange Commission(SEC) and the financial
Accounting Standards Board(FASB) have been working with their international
counterparts on convergence efforts to develop high quality, internationally
comparable financial information that investors find useful for decision making
in global capital markets(SEC, 2008; Financial Accounting Foundation, 2009).
The convergence efforts have focused on coordinating standard setting and
reducing differences in accounting standards. To this end, the FASB and
International Accounting Standards committee(IASB) are working to achieve
the standard-setting milestones specified in their Memorandum of
Understanding (FASB and IASB, 2008) with a goal of developing a single set of
high quality accounting standards.
In 2011, the US SEC supplemented its Roadmap by outlining a possible
framework for incorporating IFRS into the US financial reporting system that
combine elements of convergence and endorsement (SEC, 2011).
Convergence between IFRS and US Generally Accepted Accounting
Standards (GAAP) has increased over time (FASB and IASB, 2008), and the
use of IFRS has become more widespread thereby increasing investor
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
understanding and more consistent application and enforcement. The efforts to
converge accounting standards, the increasing mandatory use of IFRS
throughout the world, the development of international auditing standards have
increased comparability of accounting amounts.
This paper is to test whether the impact of IFRS convergence strategy on
foreign stock investment exists in a unique country, Taiwan, and is still identical
to what prior researches did around IFRS adoption concludes in a multinational
situation. The fundamental setting of our research is before mandatory IFRS
adoption and in a single country. Only in this way, we can further investigate
whether IFRS policy still have impact on foreign investment before adoption. If
so, how the importance and comparability of new standards for IFRS
convergence can have distinguished influence on foreign investors.
Taiwan, a considerable component in the world capital market, could be one of
the biggest countries that ever employ official convergence strategy (Bae, Tan
and Welker 2008). What we can observe about convergence policy is obviously
less than about adoption because the convergence is in a longer time span and
is employed by less country. Taiwan is a unique one with relative clear cuts of
intensive convergence. It has a determinable four-year convergence period so
that we can easier examine what’s the effect of the IFRS convergence on stock
investment.
Our results indicate that foreign investment increases for firms that affected in
IFRS convergence mainly at firm-level and partially at standard-level, after
controlling for year-fixed and industry-fixed effects. We include and control for
all firms-level characteristics, such as firm’s information environment, visibility
to investors, trading environment, the credibility of the accounting numbers, the
financial characteristics that may impact the investment preferences of mutual
fund managers.
While our results do not directly test whether mandated IFRS use is
decision-useful in the sense that it directly affects market measures, we provide
strong evidence that investment outcomes, i.e., overall foreign investment
toward a country, are affected by mandated IFRS convergence. Evidence that
foreign investment is positively associated with IFRS use in other countries
provides support that global accounting convergence benefits foreign investors.
An advantage of using a sample of firms in one unique country is that it
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
inherently controls for the various characteristics of firms in different countries.
At the same time, it controls for investing preferences that obviously vary
between investors. Overall, our study complements the concurrent studies by
providing evidence consistent with the view that a common set of global
accounting standards matters for portfolio holdings of foreign investors not just
after adoption but upon convergence, not just in an multinational situation but in
a unique country, not just the environment and enforcement of standards, but
the importance and comparability of separate standard.
Overall, we add to the growing literature studying the economic consequences
of international accounting on asset allocation decisions. Using different
research designs and various data sources, several concurrent studies (e.g.,
Amiram 2009; DeFond et al. 2011; Florou and Pope 2009; Gordon and Shima
2010; Yu 2010) find that cross-border holdings increase in the year of
mandatory IFRS adoption. In this paper, we use aggregated data and focus on
Taiwan’s foreign investors to investigate the effect of mandatory IFRS
convergence on the foreign investor allocation decisions toward Taiwan.
This paper proceeds as follows. In the second section, we provide background
information on foreign investment and IFRS convergence and develop our
hypothesis. The third section presents our sample and research design, and
the fourth section presents our results. The fifth section concludes the paper.
2. Literature Review and Hypotheses
2.1 Taiwan IFRS Convergence
The purpose of this paper is to investigate whether mandatory convergence
strategy of International financial Reporting Standards (IFRS hereafter) at the
firm level can attract foreign mutual fund investments in a unique country.
As many countries converge toward IFRS one way or another in recent years
by integrating IFRS solutions into domestic GAAP or by wholesale adoptions of
individual IFRS standards. What situation our research in is the official
convergence strategies, that is, cases where local regulators officially
announce a gradual move towards IFRS over a predetermined time frame.
In order to converge into IFRS, Taiwan’s FASB, founded by Accounting
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Research and Development Fund, formulated and promulgated new
IFRS-based financial accounting standards since 1999. From that time
Taiwan’s financial accounting standards gradually increase the new
IAS/IFRS-based standards. However, until the pronouncement of No.35
Impairment of Assets on 2004 July, there are fewer new important standards
phased in. Moreover, until the announcement of direct use policy on 2009 May,
there are eight new important standards from 2005 phased in including
impairment of assets, intangible assets, inventory, financial instruments,
payments for directors and executives, share-based payment, and non-current
assets held for sale and operating segments. There is a very intensive change
in 2004-2008 Taiwan. Therefore, we can collect the difference data from 2005.
Figure 1: The Timeline of Taiwan IFRS Convergence
Pre Convergence
On Convergence
Post Convergence
Taiwan GAAP coupled with 8
No new IFRS-based
new IFRS-based standards used
Standard used
Adoption
Conversion
D Direct Use
Taiwan GAAP
~ 2004
2005 ~ 2008
2009 ~ 2011
Dual system
IF IFRS standards
2012
2013 ~
2.2 Hypothesis Development
Prior research suggests that a major factor explaining home bias is the high
costs of obtaining information about foreign investments (Kang and Stulz 1997,
Ahearne, Griever, and Warnock 2004, Chan, Covrig, and Ng 2005). Information
in a more familiar form is expected to reduce investors’ information processing
costs (Bradshaw, Bushee, and Miller 2004).
As noted above, international mutual funds are an important subset of investors
because they represent a large subset of global financial investors (Khorana,
Servaes, and Tufano 2005); and, as sophisticated investors, they are most
likely to base their investment decisions on detailed analyses of financial
statements (Bradshaw, Bushee, and Miller 2004).
Recent researches using annual reports released document that IFRS facilitate
comparisons across firms. Most of the related researches base them on
cross-border investigation and analyze the differences around the IFRS
adoption. The researches on the effects of FIRS always compile their sample
with an adoption year determined. For example, most of countries, like E.U.,
adopt IFRS in 2005, Hong Kong, Singapore, and Philippines, adopt in 2006
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
(Vicentiu et al. 2007, Khurana and Michas 2011).
The researches indeed compare the economic consequence of convergence
and adoption all countries together, and generally it proves that adoption
compared with ‘convergence’ means a lot to investors. However, the degree of
convergence is quite different between countries. None of them tells us
whether the effect on foreign investment will change by the degree of
convergence before adoption in a unique country. Moreover, it’s difficult to
measure the degree of convergence by the various standards. It is also
necessary to distinguish the policy between convergence with and
convergence to IFRS in a unique country. The former generally set a
conversion period and a future year for direct use, but the latter not.
Consistent with this conjecture, Barth et al. (2011) provide evidence that
accounting amounts generated under IFRS are more comparable with U.S.
GAAP than those prepared under various domestic accounting standards. As a
result, foreign investors will likely direct more capital toward countries that
mandate the adoption of IFRS compared to countries that do not, given these
increased comparability benefits. In other words, the mandatory adoption of
IFRS by firms in Taiwan stock markets can increase foreign investors’
preference. Similar to their paper testing the comparative benefits on IFRS
adoption, our hypothesis is made to test the foreign investor’s comparative
benefits on IFRS convergence.
Hypothesis 1: Firms affected more by the new standards under IFRS
convergence strategy experience higher foreign ownership.
Yu (2010) uses security-level holdings data of international mutual funds in 39
countries, and she finds an increase in international mutual fund holdings
around IFRS adoption. She also finds that the benefit is greater when there are
greater differences between IFRS and domestic GAAP and when there is
greater enforcement. This research has critical implications for our study that
the amount of differences between standards can attract foreign investors in a
unique country. As the difference is greater, the original domestic GAAP
employed can be more incomparable with other, the original domestic
standards can be used much more than other. To sum up, a larger difference
means the original standard (or local GAAP) should be either unique or
important to a firm or industry. Therefore, when a unique and important
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
standard converge into a uniform one, the effects represents the greater benefit
of comparability and familiarity. This concept is not only fit for a country but for a
unique firm, even a single standard.
Hypothesis 2: Firms affected by a new standard with more cumulative
difference under IFRS convergence strategy experience higher foreign
ownership.
The IASB identified the qualitative characteristics of accounting information that
distinguish better information from inferior information for decision-making
purposes. We further utilize the relevance qualitative characteristics to examine
whether comparability benefits foreign investors through enhancing predictive
value and confirmatory value. We use recurrence and itemization as proxy for
the former, and execute a change model regression for the latter. The result
that recurrence is pronounced alone and intercourse with the difference
amounts reveals investors regard predictive value of financial reporting
comparability decisive. The consistent result of the change model regression
explains the confirmatory value of comparability is also important.
According to prior multinational researches, when IFRS is credibly
implemented and increasing in uniformity, IFRS adoption improves
comparability as expected. These two measures are much concerning about
faithful representation, completeness and neutrality. However, no research
explicitly elaborates the factors influence investors’ decision making, relevance,
feedback value and predictive value.
Figure 2: Conceptual Framework for Financial Reporting 2010 Approved
by IASB
Relevant information is capable of making a difference to a financial statement
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
user’s decisions. Relevant information has predictive value, i.e. it helps users to
evaluate the potential effects of past, present, or future transactions or other
events on future cash flows, and confirmatory value, in other words, it helps to
confirm or revise their previous evaluations.
In our context, it implicates that mandatory IFRS convergence in a unique firm
can also apparently reduce the costs incurred by foreign investors in
understanding multiple sets of accounting standards. The last, the amount of
difference between one new standard of recurring item, like employee benefits
and inventory, and its old one can be linked to foreign investors’ interest. The
recurring items have greater future cumulative effect than the nonrecurring
items, like those available for sale assets and long-term assets impairment.
The dollar amount of standard’s difference reflects the quantitative importance
of an item, while the discrimination of recurring items distinguishes the
qualitative importance of an item. These two kinds of importance will be
integrated all together into foreign investment decision. Based on the above
arguments, we expect IFRS convergence and adoption to increase
cross-border investment in IFRS users. Therefore, we hypothesize the
following (in alternative form):
Hypothesis 3: Firms affected by a new standard highly recurring or more
itemized under IFRS convergence strategy experience higher foreign
ownership.
3. Methodology and Research Design
3.1 Sample
The holdings of Taiwan securities by mutual fund investors is drawn from the
reports on the holdings of overseas and foreign Investments published by an
official site of the Taiwan Security Exchange, named as Market Observation
Post System, and checked with the Taiwan Economic Journal (TEJ) database.
Our full sample consists of 1,505 firms and a total 10,209 firm-year
observations affected from 2005 to 2012. We define the cumulative effects of
new IFRS-based convergence as two categories. NI denotes the new
standards create net income-related cumulative effect in a year. While NW
denotes the new standards create net assets-related (or net worth-related)
cumulative effect in a year. We use the lead-year cumulative difference to avoid
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
the potentially confounding effects in the transition year. Our additional analysis
includes a benchmark sample of 2,589 firm-year observations over the period.
We collect financial analysts following from TEJ expertise database, the
securities firm financial forecast database, in order to replace the I/B/E/S
financial analysts following used by extant researches. We collect MSCI firms
from MSCI website, and GDR firms from Taiwan Securities Exchange
Company (TSEC). Other related financial statement and stock performance
variables are also from the TEJ database. To mitigate the influence of outliers,
we winsorize all of the scaled independent variables included in our multivariate
regression analysis (i.e., IFRS, ROE, Returns, Return variation, LEV, Div. yield,
Book-to-market, E–P ratio, Sales growth, Turnover, Cash, and Closely held) at
the top and bottom 1% of their distributions. The distribution of final sample on
five renewed standard, its items inclusive, is prepared as follows. In Table 1, we
can see inventory (S3) and share-based payment (S1) affect most companies.
The financial assets reclassification (S2) and assets impairments standards
(S4), have more items but fewer observations affected.
See Appendix A for more information on these five standard variables.
IFRS
S1
S2
S3
S4
S5
All
Table 1 Sample Distributions
NI
NW
Affected Unaffected Total Affected Unaffected
1,360
451
5,698
291
712
6,970
8,849
9,758
4,511
9,918
9,497
3,239
10,209
10,209
10,209
10,209
10,209
10,209
2,057
370
1,938
156
1,259
4,479
8,152
9,839
8,271
10,053
8,950
5,730
Total Items
10,209
10,209
10,209
10,209
10,209
10,209
16
33
12
65
12
138
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 2 Descriptive Statistics on Firm-Level Variables
PANEL A
Foreign holdings,
percentage ownership
Domestic holdings,
percentage ownership
Foreign holdings,
Number of funds
Domestic holdings,
Number of funds
Nanalyst
NI Affected (N=6,970)
NI Unaffected (N=3,239)
NW Affected (N=4,479)
NW Unaffected (N=5,730)
Mean Median
Median
Std. Dev.
Std. Dev
Mean
Median
Median
Std. Dev.
Std. DevMean
Median
Median
Std. Dev.
Std. DevMean
Median
Median
Std. Dev.
Std. Dev
3.17
0.11
7.53
2.49
0.00
6.80
3.23
0.12
7.63
2.73
0.00
7.05
1.35
0.00
3.24
1.14
0.00
3.19
1.45
0.00
3.35
1.15
0.00
3.11
28.87
2.00
96.55
16.68
0.00
69.33
28.80
2.00
98.44
22.03
1.00
80.73
8.41
1.00
23.00
6.07
0.00
17.52
9.04
1.00
23.66
6.60
0.00
19.46
2.36
0.00
4.09
4.51
2.00
5.67
2.97
1.00
4.63
3.09
1.00
4.85
MSCI
0.10
0.00
0.56
0.10
0.00
0.30
0.11
0.00
0.31
0.10
0.00
0.60
Market
0.57
1.00
0.49
0.57
1.00
0.50
0.60
1.00
0.49
0.55
1.00
0.50
GDR
0.04
0.00
0.21
0.03
0.00
0.18
0.05
0.00
0.22
0.03
0.00
0.18
Big5
0.75
1.00
0.43
0.64
1.00
0.48
0.74
1.00
0.44
0.69
1.00
0.46
Size
8.07
7.93
1.54
8.05
7.92
1.55
8.17
8.02
1.58
7.98
7.85
1.52
ROE
0.03
0.06
0.20
0.04
0.08
0.23
0.03
0.07
0.20
0.03
0.07
0.22
Return
0.16
-0.02
0.74
0.17
0.05
0.58
0.20
-0.04
0.81
0.14
0.03
0.59
RetVar
0.12
0.11
0.06
0.12
0.11
0.06
0.13
0.12
0.06
0.12
0.10
0.06
LEV
0.37
0.35
0.19
0.40
0.39
0.20
0.37
0.35
0.19
0.39
0.37
0.19
DivYld
0.05
0.04
0.05
0.05
0.04
0.05
0.05
0.03
0.05
0.05
0.04
0.05
BM
0.90
0.79
0.52
0.81
0.71
0.48
0.87
0.74
0.53
0.87
0.79
0.49
EP
-0.27
0.49
2.77
-0.28
0.58
2.98
-0.29
0.50
2.89
-0.26
0.53
2.80
SalesGrowth
0.02
0.00
0.33
0.06
0.05
0.32
0.04
0.01
0.34
0.03
0.02
0.31
Turnover
1.70
1.18
1.60
1.81
1.25
1.71
1.93
1.42
1.69
1.59
1.05
1.57
Cash
0.14
0.10
0.14
0.13
0.09
0.13
0.14
0.10
0.13
0.14
0.09
0.13
CloselyHeld
0.29
0.17
0.33
0.32
0.20
0.35
0.28
0.16
0.33
0.32
0.19
0.35
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Proceedings of 23rd International Business Research Conference
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Table 2 Descriptive Statistics on Firm-Level Variables─Continued
PANEL B
NI Affected (N=6,970)
Mean
NI Unaffected (N=3,239)
Median
Median
Std. Dev.
Std. DevMean
NW Affected (N=4,479)
Median
Median
Std. Dev.
Std. DevMean
NW Unaffected (N=5,730)
Median
Median
Std. Dev.
Std. DevMean
Total NI
0.60
0.04
0.81
0.06
0.03
0.09
Total NW
0.18
0.00
0.20
0.03
0.02
0.03
NI
0.04
0.00
59.69
6.40
0.00
74.37
NW
0.04
0.00
45.81
5.63
0.00
57.05
ITEM
0.36
0.29
0.31
0.38
0.36
0.33
RECUR
0.76
1.00
0.56
0.68
1.00
0.46
NI
7.09
0.00
41.15
8.52
0.00
67.66
NW
4.19
0.00
10.08
7.31
0.00
29.89
ITEM
0.22
0.27
0.11
0.22
0.27
0.13
RECUR
0.91
1.00
0.85
0.79
1.00
0.48
NI
4.48
0.20
38.53
5.13
1.01
18.49
NW
1.97
0.00
27.84
3.07
0.00
34.68
ITEM
0.28
0.30
0.21
0.28
0.20
0.25
RECUR
0.73
1.00
0.58
0.63
1.00
0.49
NI
1.34
0.00
16.03
0.42
0.00
7.41
NW
0.19
0.00
5.37
1.13
0.00
18.88
ITEM
0.01
0.00
0.03
0.01
0.00
0.02
RECUR
0.03
0.00
0.09
0.04
0.00
0.10
NI
3.09
0.00
16.85
1.44
0.00
17.33
NW
8.26
0.00
68.01
17.31
0.00
18.60
ITEM
0.03
0.00
0.14
0.05
0.00
0.16
RECUR
0.01
0.00
0.03
0.01
0.00
0.04
S1=
No.39-IFRS2
S2=
No.34-IAS39
S3=
No.10-IAS2
S4=
No.35-IAS36
S5=
No.36-IAS32
Median
Median
Std. Dev.
Std. Dev
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
TABLE 3 Pearson/Spearman Correlation Coefficients among Firm-Specific Variables with Two-Tailed p-Values below
(N=10,209 firm-years)
Spearman \ Pearson
(1)
(2)
(3)
(4)
Nanalyst MSCI
Market
GDR
Big5
Size
NI
NW
(1) Foreign holdings,
percentage ownership
1
.685
.000
.162
.000
.435
.000
.037
.000
.072
.000
.103
.000
.086
.000
.093
.000
.088
.000
.033
.001
.060
.000
(2) Foreign holdings,
Number of funds
.944
.000
1
.093
.000
.605
.000
.025
.010
.068
.000
.112
.000
.099
.000
.079
.000
.103
.000
.044
.000
.105
.000
(3) Domestic holdings,
percentage ownership
.501
.000
.513
.000
1
.492
.000
.013
.192
.011
.283
.003
.758
.019
.060
.074
.000
.021
.034
.019
.055
.001
.958
(4) Domestic holdings,
Number of funds
.578
.000
.615
.000
.918
.000
1
.053
.000
.061
.000
.098
.000
.094
.000
.098
.000
.101
.000
.157
.000
.092
.000
Nanalyst
-.002
.855
-.015
.142
.021
.032
.026
.008
1
.275
.000
.227
.000
.327
.000
.108
.000
.625
.000
-.033
.001
-.030
.002
MSCI
.156
.000
.167
.000
.083
.000
.117
.000
.369
.000
1
.140
.000
.269
.000
.108
.000
.350
.000
-.011
.276
-.015
.124
Market
.184
.000
.215
.000
.088
.000
.137
.000
.249
.000
.247
.000
1
.179
.000
.181
.000
.446
.000
-.008
.391
.010
.322
GDR
.126
.000
.132
.000
.062
.000
.089
.000
.234
.000
.447
.000
.179
.000
1
.113
.000
.384
.000
-.011
.266
-.016
.099
Big5
.179
.000
.188
.000
.142
.000
.160
.000
.104
.000
.171
.000
.181
.000
.113
.000
1
.231
.000
.006
.551
.014
.167
Size
.137
.000
.154
.000
.071
.000
.105
.000
.618
.000
.465
.000
.470
.000
.291
.000
.223
.000
1
-.069
.000
-.057
.000
NI
.155
.000
.185
.000
.118
.000
.138
.000
-.349
.000
-.133
.000
-.090
.000
-.058
.000
.045
.000
-.254
.000
1
.265
.000
.089
.101
.103
.000
.000
.000
For definitions on other variables see Appendix B.
.118
.000
-.087
.000
-.019
.049
.016
.110
-.002
.825
.039
.000
-.043
.000
.376
.000
1
NW
12
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 2 presents descriptive statistics of the variables used in our analysis.
Panel A reports firm-level descriptive statistics on foreign mutual fund
ownership. We further reports firm-level and standard-level descriptive
statistics on our itemization and recurrence measure in Panel B. The panel
shows that for the sample firms affected, the firm-level mean and median
foreign mutual fund ownership is much greater than domestic mutual fund
ownership, while for the non-IFRS affected firms, their mean or median
ownership is also much smaller than IFRS affected firms no matter than
domestic or foreign mutual funds.
The panel B shows that our itemized and recurring measures ranges from a low
(representing less disclosure) of 3% in S5 to a high (representing more
disclosure) of 38% in S1 for the sample firms NW affected. Panel B of Table 2
reports descriptive statistics on our itemization measure, which is used to
create our standard-firms partition capturing increases in disclosure. The panel
indicates that the itemization occurs in the NI affected and NW affected is no big
difference. Panel B of Table 2 reports descriptive statistics for the firm-level and
firm-level control variables used in our multivariate analysis, with the sample
firms affected and the firms unaffected shown separately. The panel shows a
reasonably high degree of variation in many of the variables.
3.2 Itemization and Recurrence
We define accounting standards itemization for a firm as the ratio of related
items contained in the cumulative effects to all items of the accounting standard.
We capture itemization based on its differences because investment
professionals intentionally use standard-oriented analysis as global comparing
information. The accounts and items classification are based on the definitions
of TEJ database (e.g., S1 has 16 items, S2=33, S3=12, S4=65, S5=12). We
use the detailed calculation of TEJ database to capture the firms and standards
included in our itemization measure.
While a commonly espoused outcome of IFRS adoption is increased disclosure
in view of management-orientation, there is little evidence on this issue
regarding mandatory IFRS convergence. A potential alternative explanation for
improved comparability is that they are caused by increased disclosure rather
than by increased amounts and items of difference. Nevertheless, we still
repeat our analysis because the extent of increased disclosures under IFRS is
relatively proportional to the items and amounts of difference (Li, 2010),
especially in a unique country.
We measure recurring using the percentage of producing differences in
standard level all the sample years following the test year, which is an outcome
measure of its actual behavior. The percentage is computed as the average
across measures of firm-level, with higher values indicating standard with
relatively more recurring.
Since this percentage is an output measure of the financial reporting system, it
reflects all the reporting incentives faced by managers, including those
provided by a highly rule of law and concentrated ownership. The notion that
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
underlies this measure is that less firm-level financial reporting recurrence
result in poor predictive value of accounting standards, which in turn leads to
less comparative financial reporting. Firms are classified as having highly
recurrence based, and as having fully disclose on the sample firm-level median.
4. Empirical Results and Findings
4.1. Univariate Analysis
Table 3 presents a univariate analysis comparing foreign mutual fund
ownership, Pearson and Spearman correlation coefficients, for the associations
among the firm-specific variables. The first eight rows of the table present the
correlations between the mutual fund ownership measures (domestic and
foreign holdings measured as percentage ownership and number of funds) and
each of our independent variables. We find a significant positive correlation
between both foreign mutual fund holding measures and IAS usage but mixed
results for the domestic mutual fund holding measures.
In addition, consistent with Covrig, Lau, and Ng [2006], we find that foreign
mutual fund ownership levels are positively correlated with richer information
environments (as captured by number of analysts and size) and higher visibility
(as captured by major local and global index membership), at p<1% (two-tailed).
In our untabulated result, we also find that foreign mutual fund ownership is
positively correlated with cross-listing, Big 5 auditors, higher return on equity,
higher stock returns, lower book-to-market ratios, and higher earnings-to-price
ratios, at p<1% (two-tailed).
Thus, the analysis in Table 3 suggests that, on average, mandatory IFRS
convergence in the TAIWAN results in increased foreign mutual fund
investment and that this increase is significantly larger than the increase in
non-IFRS adopting firms during the same period. In the following section we
examine this investment in a multivariate analysis.
4.2. Baseline Analysis
To test the relation between foreign mutual fund holding and mandatory IFRS
convergence, we estimate the following model by first using our sample period
of on and post convergence, from 2005 to 2012.
(
)
(
)
(
)
(1)
(
)
Prior research (e.g., Karolyi and Stulz 2003) provides analytical evidence that
investors that are mean-variance optimizers should hold the world market
portfolio of common stocks. However, we follow Vientiu et al. (2007) who use
two measures of foreign mutual fund holdings and domestic mutual fund
holdings. One is the most commonly used proxy in the literature and equals the
percentage ownership, that is total number of shares owned by the mutual
funds divided by the total number of shares outstanding. The other measure is
the natural logarithm of the number of mutual funds invested in the company, a
measure that can provide additional insight on the size of the institutional
14
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
following.
A comparative analysis of domestic mutual funds holding is included in our
empirical test. Our hypothesis predicts the coefficient on IFRS to be positive
when the dependent variable is foreign holdings. We also estimate the above
model with domestic mutual fund holdings as the dependent variable, although
we do not have a prediction for the sign of the coefficient on the IFRS dummy
because it is unclear whether IFRS convergence adds significantly to the
information set already available to domestic fund managers.
We speculate that, compared to foreign investors, domestic investors are likely
to have better access to alternative information channels and be more
comfortable with local accounting standards. For example, domestic investors
probably have easier direct access to managers and local analysts, possess
greater knowledge of local economy and markets, and have a better
understanding of alternative accounting methods allowed under local
accounting standards. Thus, IFRS convergence may not result in significantly
more useful information to domestic investors and therefore may have little
impact on their investment decisions.
What we are interested in are two variables and two measurements. Because a
set of two-year comparative financial statement is required in Taiwan, it is a
weighted average of prior year cumulative effects divided by market value of
equity outstanding in the year-end before test year. We count two types of
cumulative effects: One is NI(net income), on account of the increasing
comparability function by time and amount, it weighs prior two-year difference
by 1/3 and 2/3 on income accounts from five new standards used. The other is
NW(net worth), it weighs the prior three-year difference by 1/6, 2/6 and 3/6, on
asset-liability accounts. These two cumulative effects are accumulated
respectively to the year-end before test year in order to observe its forward
impact on change of investment.
CONTROLs denotes a set of predetermined control variables that proxy for
various firm level characteristics that have been linked in the prior literature to
the foreign mutual fund holding. We set dummy variables, DINDUSTRY,
capturing industry effects. It includes 23 industry groups by TSEC industry
membership codes. Using DYEAR variables capturing year effects is because
firm’s situation through 2008 global financial crisis is distinguishable. The other
three model are expansion model from the baseline model. All about detailed
definitions of all variables are provided as appendix B.
4.3. Cross-sectional Analysis
We argue that the comparability of financial reporting is the function of time and
amount. Intuitively, the time close to the decision-making point is most
predictive. On the other hand, the largest amount is generally most decisive.
However, every standard is pronounced or revised on its own date. What is the
separate effect of a unique standard on foreign investment? We can test its
convergence effect over their respective transfer years in contrast to the
aggregated number of all differences in whole convergence period. We
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
transform the five unique standards set S1 to S5 as listed in appendix A into
binary variables and respectively interact these binary variables with the
amount of standard-level differences which is weighed as the aggregated
difference in the empirical model (1).
Based on argue that comparability function will be increasing by the time and
the amount, we first weigh the amounts cross periods, and further we want to
know the discriminate effect in a period. In order to examine whether the
cumulative effect will be obviously increasing by the amount of standard-level
differences, we first rank the amounts in a firm and then test the model again.
Our hypothesis test examines whether mandatory IFRS convergence results in
a greater increase in foreign mutual fund investment among firms in firms with
highly recurring and with relatively more itemized. We are primarily interested in
the role of recurrence and itemization among IFRS-NI affected firms.
16
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 4 Baseline Regression of Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variables
𝐻𝑂𝐿𝐷𝐼𝑁𝐺𝑡 𝛽
𝛽 (𝐼𝐹𝑅𝑆𝑡 )
𝛽𝑖 (𝐶𝑂𝑁𝑇𝑅𝑂𝐿𝑠𝑡 𝑖 ) 𝛽𝑗 (𝐷𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌𝑡 𝑗 ) 𝛽𝑘 (𝐷𝑌𝐸𝐴𝑅𝑡 𝑘 ) 𝑒
(1)
Dep. var.
Test Variable:
IFRS
Percentage Ownership
Foreign Holding
Domestic Holding
NI%
NW%
NI%
NW%
0.034***
0.052***
0.021**
0.004
(0.001)
(0.000)
(0.036)
(0.682)
Number of Funds
Foreign Holding
Domestic Holding
NI%
NW%
NI%
NW%
0.043***
0.092***
0.157***
0.090***
(0.000)
(0.000)
(0.000)
(0.000)
-0.001
(0.992)
0.030***
(0.004)
0.071***
(0.000)
0.059***
(0.000)
0.069***
(0.000)
0.004
(0.836)
-0.008
(0.549)
0.008
(0.559)
0.006
(0.631)
0.001
(0.973)
-0.002
(0.864)
0.006
(0.662)
-0.015
(0.324)
0.017**
(0.102)
0.070***
(0.000)
0.075***
(0.000)
0.044***
(0.000)
0.026
(0.187)
-0.002
(0.890)
0.005***
(0.691)
0.000
(0.976)
0.003
(0.778)
-0.005
(0.628)
0.012
(0.340)
Firm-level controls:
Nanalyst
MSCI
Market
GDR
Big5
Size
ROE
Return
RetVar
LEV
DivYld
BM
-0.001
(0.969)
0.031***
(0.004)
0.070***
(0.000)
0.059
(0.000)
0.068**
(0.061)
0.005
(0.820)
-0.008
(0.546)
0.008
(0.570)
0.007**
(0.590)
0.000
(0.980)
-0.003
(0.975)
0.005
(0.712)
-0.021**
(0.178)
0.004***
(0.742)
0.002
(0.899)
0.016*
(0.166)
0.063***
(0.000)
-0.027**
(0.176)
-0.011
(0.396)
-0.009
(0.499)
-0.015*
(0.227)
-0.004
(0.766)
-0.001
(0.937)
-0.023*
(0.075)
-0.020*
(0.192)
0.004
(0.732)
0.002
(0.874)
0.016**
(0.162)
0.063***
(0.000)
-0.029**
(0.149)
-0.011
(0.381)
-0.009
(0.503)
-0.015
(0.216)
-0.004
(0.769)
-0.002
(0.895)
0.023*
(0.069)
-0.014
(0.364)
0.018**
(0.090)
0.068***
(0.000)
0.075***
(0.000)
0.041***
(0.000)
0.028*
(0.150)
-0.002
(0.900)
0.005
(0.717)
0.001
(0.916)
0.001
(0.940)
-0.007
(0.537)
0.011
(0.393)
-0.003
(0.852)
0.015*
(0.151)
0.059***
(0.000)
0.063***
(0.000)
0.064
(0.000)
0.025*
(0.199)
-0.002***
(0.896)
-0.005
(0.689)
-0.009
(0.454)
-0.003
(0.817)
0.007
(0.577)
-0.010***
(0.375)
0.002
(0.895)
0.016*
(0.123)
0.060***
(0.000)
0.064***
(0.000)
0.065***
(0.000)
0.015
(0.433)
-0.004
(0.758)
-0.005
(0.703)
-0.010
(0.405)
0.005
(0.665)
-0.015
(0.193)
-0.007***
(0.579)
17
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 4 Baseline Regression of Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variables─ Continued
𝐻𝑂𝐿𝐷𝐼𝑁𝐺𝑡 𝛽
𝛽 (𝐼𝐹𝑅𝑆𝑡 )
𝛽𝑖 (𝐶𝑂𝑁𝑇𝑅𝑂𝐿𝑠𝑡 𝑖 ) 𝛽𝑗 (𝐷𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌𝑡 𝑗 ) 𝛽𝑘 (𝐷𝑌𝐸𝐴𝑅𝑡 𝑘 ) 𝑒
(1)
Dep. var.
Percentage Ownership
Foreign Holding
Domestic Holding
NI%
NW%
NI%
NW%
-0.017*
-0.016
0.024**
0.024**
(0.183)
(0.199)
(0.060)
(0.062)
-0.015
-0.015
0.004
0.004
(0.169)
(0.159)
(0.731)
(0.742)
-0.002
-0.003
0.019
0.019*
(0.839)
(0.802)
(0.111)
(0.115)
-0.009
-0.009
-0.002
-0.002*
(0.414)
(0.409)
(0.842)
(0.839)
-0.001
-0.003
-0.033**
-0.033**
(0.940)
(0.812)
(0.014)
(0.014)
Number of Funds
Foreign Holding
Domestic Holding
NI%
NW%
NI
NW
-0.018
-0.017
-0.003
0.001
(0.139)
(0.167)
(0.801)
(0.946)
-0.012
-0.012
0.001
-0.006
(0.283)
(0.259)
(0.922)
(0.587)
0.006
0.005***
0.013
0.012
(0.623)
(0.680)
(0.251)
(0.327)
-0.020**
-0.020**
-0.012
-0.013
(0.072)
(0.069)
(0.267)
(0.254)
0.012
0.008
0.003
0.000
(0.347)
(0.531)
(0.812)
(0.994)
DIndustry
YES
YES
YES
YES
YES
YES
YES
YES
DYear
YES
YES
YES
YES
YES
YES
YES
YES
0.041
0.040
0.010
0.010
0.065
0.071
0.072
0.056
10,209
10,209
10,209
10,209
10,209
10,209
10,209
10,209
Test Variable
EP
SalesGrowth
Turnover
Cash
CloselyHeld
Adj. R
N
2
Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign
mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by
domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their
investees. See Appendix B for definitions on other variables.
a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better,
respectively.
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
In table 5 panel A, we find that S1 is the most important to foreign and domestic
investor, and S3 is significant to investor following but it seem to negatively
affect the intention to increase the stock holding. Overall, from S2 to S5 it
seems to be very inconsistently significant to investor that we can know there is
no preference for investor to choose the stock with comparability benefit. The
explanation should lead to further studies about the preference of different
types of investors.
In table 5 panel B, we find that R1 is the most important to foreign and domestic
investor, R2 and R3 is average significant to investor following but it seem to
negatively affect the intention of domestic investors to increase the stock
holding. Overall, from R1 it seems to be very consistently significant to investor
that we can know there is a preference for investor to choose the stock with
most comparability benefit.
4.4. Multivariate (Attribute) Analysis
Based on the analysis of attribute of IFRS-based standard, we test our
hypothesis by regressing foreign mutual fund holdings on three dummy
variables (and their interactions) indicating: (1) whether there is a key amount of
differences (R1), (2) whether the firms has highly recurring difference, and (3)
whether IFRS convergence results in more items of difference, and a set of
control variables as listed in Appendix A.
Our hypothesis predicts that the coefficient 𝛽7 is positive. This coefficient
equals the incremental foreign mutual fund ownership after 2005 for mandatory
firms affected that experience larger itemization in highly recurring firms,
relative to the weak recurring firms. Panel A shows that this coefficient equals
0.006 and is insignificant at pr1%. However, IFRS*RECUR ( 𝛽5 ) indicates that the
increase in foreign mutual fund holdings by indicator is about 24% larger among
firms that experience with highly recurring, when compared to firms in firms with
weak recurring. That’s could be the most meaningful finding we have. The
Interaction of The amount of cumulative effect and expected future recurrence
effect obviously exceeds other situations.
To better understand the interpretation of the coefficients in Panel A, Panel B of
Table 6 reconstructs the coefficients for each of the four categories of firms in
our sample (Untabulated). The four categories are based on whether the firms
are in firms with highly recurring and whether the firms experience a large
increase in itemization. The bottom two rows of Panel B report the results for
firms in firms with highly recurring. The bottom row shows that the ownership for
the firms in firms with highly recurring that experience large increases.
19
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 5 Cross-sectional Analysis Regression of the Change in Foreign/Domestic Mutual Fund Ownership on IFRS and
Control Variables
𝐻𝑂𝐿𝐷𝐼𝑁𝐺𝑡 𝛽
𝛽 (𝐼𝐹𝑅𝑆𝑡 )
𝛽𝑖 (𝐶𝑂𝑁𝑇𝑅𝑂𝐿𝑠𝑡 𝑖 ) 𝛽𝑗 (𝐷𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌𝑡 𝑗 ) 𝛽𝑘 (𝐷𝑌𝐸𝐴𝑅𝑡 𝑘 ) 𝑒
(2)
Panel A Partition the cumulative effects by standards
Dep. var.
Percentage Ownership
Foreign Holding
Domestic Holding
NI
NW
NI
NW
0.079***
0.054***
0.078***
0.050***
(0.000)
(0.000)
(0.000)
(0.000)
0.010
-0.005
-0.010
-0.011
(0.413)
(0.682)
(0.400)
(0.339)
-0.035**
0.034***
-0.038**
-0.004
(0.071)
(0.004)
(0.055)
(0.760)
0.005
0.030***
-0.025
-0.004
(0.706)
(0.011)
(0.065)
(0.743)
0.010
0.042***
-0.007
-0.004
(0.531)
(0.000)
(0.669)
(0.741)
Number of Funds
Foreign Holding
Domestic Holding
NI
NW
NI
NW
0.065***
0.060***
0.195***
0.220***
(0.001)
(0.000)
(0.000)
(0.000)
0.010
0.005
0.008
0.006***
(0.374)
(0.861)
(0.495)
(0.000)
-0.010
0.100***
0.021**
0.067***
(0.591)
(0.000)
(0.269)
(0.000)
0.016**
0.008
0.015**
0.001
(0.223)
(0.487)
(0.231)
(0.920)
0.023**
0.080***
0.002
0.032***
(0.158)
(0.000)
(0.896)
(0.006)
Firm-level controls
YES
YES
YES
YES
YES
YES
YES
YES
DIndustry
YES
YES
YES
YES
YES
YES
YES
YES
DYear
YES
YES
YES
YES
YES
YES
YES
YES
0.043
0.047
0.015
0.014
0.065
0.081
0.080
0.089
6,970
4,479
6,970
4,479
6,970
4,479
6,970
4,479
Test Variable
S1(No.39-IFRS2)
S2(No.36-IAS39)
S3(No.10-IAS2)
S4(No.35-IAS36)
S5(No.36-IAS32)
Adj. R
N
2
Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign
mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by
domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their
investees. See Appendix B for definitions on other variables.
a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better,
respectively.
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Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Table 5 Cross-sectional Analysis Regression of the Change in Foreign/Domestic Mutual Fund Ownership on IFRS and
Control Variables
𝐻𝑂𝐿𝐷𝐼𝑁𝐺𝑡 𝛽
𝛽 (𝐼𝐹𝑅𝑆𝑡 )
𝛽𝑖 (𝐶𝑂𝑁𝑇𝑅𝑂𝐿𝑠𝑡 𝑖 ) 𝛽𝑗 (𝐷𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌𝑡 𝑗 ) 𝛽𝑘 (𝐷𝑌𝐸𝐴𝑅𝑡 𝑘 ) 𝑒
(2)
Panel B Partition the cumulative effects by amounts ranking
Dep. var.
Percentage Ownership
Foreign Holding
Domestic Holding
NI
NW
NI
NW
0.015*
0.075***
-0.035**
-0.002
(0.533)
(0.000)
(0.153)
(0.889)
0.018*
-0.007
0.061***
0.024**
(0.463)
(0.681)
(0.007)
(0.141)
0.038***
0.021**
-0.008
-0.009
(0.002)
(0.173)
(0.538)
(0.563)
Number of Funds
Foreign Holding
Domestic Holding
NI
NW
NI
NW
0.134***
0.131***
0.095***
0.104***
(0.000)
(0.000)
(0.000)
(0.000)
-0.006
-0.004
0.096***
0.090***
(0.707)
(0.833)
(0.000)
(0.000)
0.019**
0.032**
0.007
-0.006
(0.216)
(0.082)
(0.585)
(0.681)
Firm-level controls
YES
YES
YES
YES
YES
YES
YES
YES
DIndustry
YES
YES
YES
YES
YES
YES
YES
YES
DYear
YES
YES
YES
YES
YES
YES
YES
YES
0.043
0.054
0.014
0.017
0.070
0.070
0.069
0.060
6,970
4,479
6,970
4,479
6,970
4,479
6,970
4,479
Test Variable
RANK1
RANK2
RANK3
Adj. R
N
2
Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign
mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by
domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their
investees. See Appendix B for definitions on other variables.
a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better,
respectively.
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Table 6 Attributes Analysis Regression of the Foreign Mutual Fund Ownership Ownership/Number— NI Cumulative Effects
of Firm Level
𝐻𝑂𝐿𝐷𝐼𝑁𝐺𝑡
𝛽
𝛴𝛽 (𝐼𝐹𝑅𝑆𝑡 ) 𝛴𝛽2 (𝑅𝐸𝐶𝑈𝑅𝑡 ) 𝛴𝛽3 (𝐼𝑇𝐸𝑀𝑡 ) 𝛴𝛽4 (𝐼𝑇𝐸𝑀𝑡 ) ∗ (𝑅𝐸𝐶𝑈𝑅𝑡 ) 𝛴𝛽5 (𝐼𝐹𝑅𝑆𝑡 ) ∗ (𝑅𝐸𝐶𝑈𝑅𝑡 )
𝛴𝛽7 (𝐼𝐹𝑅𝑆𝑡 ) ∗ (𝑅𝐸𝐶𝑈𝑅𝑡 ) ∗ (𝐼𝑇𝐸𝑀𝑡 )
𝛽𝑖 (𝐶𝑂𝑁𝑇𝑅𝑂𝐿𝑠𝑡 𝑖 ) 𝛽𝑗 (𝐷𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌𝑡 𝑗 ) 𝛽𝑘 (𝐷𝑌𝐸𝐴𝑅𝑡 𝑘 ) 𝑒
Dep. Var.
Test Variable
Foreign
0.038**
IFRS
(0.052)
0.362***
RECUR
(0.000)
0.240***
ITEM
(0.000)
0.031*
ITEM*RECUR
(0.180)
0.013
IFRS*RECUR
(0.518)
0.059*
IFRS*ITEM
(0.318)
0.006
IFRS*RECUR*ITEM
(0.738)
Percentage Ownership
Level
Domestic
Foreign
0.048**
0.024*
(0.014)
(0.150)
0.365***
0.571***
(0.000)
(0.000)
0.239***
0.081
(0.000)
(0.000)
0.019*
0.039***
(0.109)
(0.020)
0.011
0.239***
(0.609)
(0.000)
0.059*
-0.055
(0.319)
(0.275)
0.006
-0.038**
(0.724)
(0.011)
Indicator
Domestic
0.038**
(0.021)
0.574***
(0.000)
0.080***
(0.000)
0.036***
(0.010)
0.236***
(0.000)
-0.054*
(0.277)
-0.037**
(0.011)
Foreign
0.014
(0.431)
0.354***
(0.000)
0.244***
(0.000)
0.013**
(0.063)
0.015
(0.463)
0.060
(0.316)
0.005
(0.797)
𝛴𝛽6 (𝐼𝐹𝑅𝑆𝑡 ) ∗ (𝐼𝑇𝐸𝑀𝑡 )
(3)
Number of Funds
Level
Domestic
Foreign
-0.020
-0.005
(0.276)
(0.751)
0.354***
0.566***
(0.000
(0.000)
0.245***
0.084***
(0.000)
(0.000)
0.016**
0.040***
(0.043)
(0.000)
0.016
0.240***
(0.443)
(0.000)
0.057
-0.056
(0.337)
(0.264)
0.005
-0.038**
(0.767)
(0.010)
Indicator
Domestic
-0.005
(0.760)
0.567***
(0.000)
0.083***
(0.000)
0.039***
(0.000)
0.239***
(0.000)
-0.057
(0.258)
-0.038**
(0.011)
Industry indicators
YES
YES
YES
YES
YES
YES
YES
YES
Year indicators
YES
YES
YES
YES
YES
YES
YES
YES
0.043
0.054
0.014
0.017
0.070
0.070
0.069
0.060
6,970
6,970
6,970
6,970
6,970
6,970
6,970
6,970
Adj. R
N
2
Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign
mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by
domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their
investees. See Appendix B for definitions on other variables.
a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better.
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Proceedings of 23rd International Business Research Conference
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5. Conclusion
The purpose of this study is to test whether foreign investors are differentially
attracted to companies that mandatorily converge into IFRS. Using foreign
mutual fund ownership as a proxy for foreign investor preferences, we
hypothesize that firms with larger difference have a larger proportion of stock
ownership by foreign mutual funds. Results from our multivariate analysis
support our hypothesis by finding that foreign mutual fund ownership is higher
among firms affected by IFRS-based standard compared to firms using local
accounting standards.
This study further examines the effect of adopting a unique accounting
standard on comparability and cross-border investment. While we expect
improved comparability to result in increased cross-border investment, we
predict that mandatory IFRS convergence will lead to improved comparability
only when there is a better basis on predictive value. Consistent with our
prediction, we find that mandatory IFRS convergence results in a greater
increase in foreign investment among companies with more disclosure and
higher probability of recurrence in future. Although we find that not every
standard with these two attributes have a significant increase in foreign mutual
fund ownership, some effective result will be deductive on future extension.
Additional analysis shows that the improved comparability associated with
mandatory IFRS convergence does not increase domestic mutual fund
ownership, consistent with domestic investors being more familiar with local
accounting standards.
Moreover, the inferences drawn from the evidence provided in this study are
useful to regulators, especially when confronted with the proposed adoption of
IFRS with local GAAP. For example, FASB in the U.S. has supported the
development of high quality, global accounting standards since at least 1999.
This support is driven by the demand for internationally comparable financial
information that capital providers find useful for decision making in global
capital markets (FAF 2009). Given that the SEC is still considering whether to
mandate the use of IFRS for public companies (Defelice 2010), it is important to
investigate whether foreign investors view IFRS in detail as decision-useful.
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Appendix
Appendix A: New IFRS-based standards in Taiwan from 2005 to 2008.
No. Title of Taiwan financial Accounting Standard IFRS
Revision Date
05
10
34
Dec. 22, 2005
Nov. 29, 2007
Sep. 22, 2005,
Oct. 17, 2008
Dec.4, 2008
Nov. 30, 2006
June 23, 2005
35
36
Long-term Investments under Equity Method IAS 39
Inventories (S3)
IAS 2
Financial Instruments: Recognition and IAS 39
Measurement (S5)
Impairment of Assets
IAS 38
Financial
Instruments:
Disclosure
and IAS 32
Presentation (S2)
37 Intangible Assets
IAS 38 July 20, 2006
38 Non-current Assets Held for Sale and IFRS 5 Nov. 30, 2006
Discontinued Operations
39 Share-based payment (S1)
IFRS 2 Aug. 23, 2007
Taiwan’s Financial Accounting Standard No.5, 34, 35, 37, and 38 are
integrated into a so-called ‘Financial Impairments Model’ in TEJ database. It is
our cross-section independence variable S4.
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Appendix B: Variable Definitions
B1. Variables of interest
Holdings: percentage ownership of mutual funds or the number of mutual
funds. The percentage ownership is computed as the total number of
shares owned by the mutual funds divided by the total number of shares
outstanding at year-end. Foreign/Domestic mutual fund ownership equals
total number of shares owned by foreign (domestic) mutual funds divided
by common shares outstanding at year-end. Foreign/Domestic mutual
funds following equals total number of foreign (domestic) mutual funds
make investments in the company at year-end.
IFRS: Aggregate amount of all (separate) differences between old local
standard and new-IFRS based one as a proportion of the market value of
equity in millions at prior year-end. It is counted into NI and NW. NI (NM)
denotes IFRS net income (Net Assets) cumulative effects.
Item: Aggregate items of separate difference between old local standard and
new-IFRS based one, divided by total items number.
Recur: Aggregate times of separate difference between old local standard and
new-IFRS based one, divided by total years after the test year to 2012.
Post: Indicator variable equal to one if a firm-year falls in or after 2009
B2. Firm-level controls:
Nanalyst: Number of securities firm analysts following the company at
year-end.
Size: Natural logarithm of the market value of equity in millions at year-end.
MSCI: Indicator variable equal to one if a company is included in MSCI World
Index at lead year-end.
Market: Indicator variable equal to one if a company is included in TSE Index.
GDR: Indicator variable equal to one if a company is listed in the Global
Depository Receipt at lead year-end listed in TSEC website.
Big5: Indicator variable equal to one if a company is audited by a Big 5 audit
firm at year-end.
ROE: Net income before extraordinary items divided by book value of equity at
year-end.
Ret: Stock returns over the fiscal year.
RetVar: Standard deviation of monthly stock returns over the fiscal year.
LEV: Total liabilities divided by total assets at year-end.
DivYld: Total dividends divided by market value of equity at year-end.
BM: Book value of equity divided by market value of equity at year-end.
EP ratio: Net income divided by market value of equity at year-end.
SalesGrowth: Annual growth rate in net sales over the fiscal year.
Turnover: Annual share volume divided by shares outstanding over the fiscal
year.
Cash: Ratio of cash and short-term investment to total assets at year-end.
CloselyHeld: Number of shares outstanding held by members of board of
directors and presidents or executives in a corporate as a proportion of
the number of common shares outstanding at year-end.
B3. Others:
DIndustry: Indicator variables indicating industry membership based on 23
industry codes of TSEC.
DYear: Indicator variables for Year.
27